Tuesday, September 16, 2008 0 comments ++[ CLICK TO COMMENT ]++

US Inflation Declines... But Still High

US inflation declined and this gives more room to the Federal Reserve:

The Labour Department reported Tuesday that consumer prices edged down 0.1 per cent last month, a significant improvement from a 1.1 per cent price spike in June and a 0.8 per cent rise in July. The cost of gasoline and other fuels have plunged, reflecting big drops in crude oil prices.


Core inflation, which excludes energy and food, was also well-behaved in August, edging up by a slight 0.2 per cent, after two months when core prices had risen by 0.3 per cent. Both the overall decline and the small increase in core inflation were in line with economists' expectations.

I have always held the view that commodities will likely drop during an ecnomic slowdown and hence inflation should moderate. That is precisely what is happening, with oil, copper, and so on, declining lately. This is also the view of Ben Bernake and he has been correct so far (many were expecting high inflation when the FedRes started cutting rates but they have been wrong, with many who took on the long commodity trade getting blown up.)

It'll be interesting to see what the FedRes does with rates today. They have some room to cut if they want to, but they probably should not. Cutting rates will provide marginal help to the current problems. If financials institutions can't make money off the current spreads, not to mention the huge sums available through FedRes lending facilities, they probably wouldn't be in business regardless of how low rates are. If rates are cut now, there is a potential for inflation problems later.


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